Your uncle offeres you a choice of $30,000in 50 years or $95 today. 
If money is discounted at 12 percent, which should you choose?

That's an easy one for me without the need of any calculation. In 50
years I will be 108 years old. Somehow I'd rather have $95 while I'm
alive than any amount of money when I'm dead.

wrong sparky;
itsthe $30k in a few years because u can sell that interest today. (theoretically)

$30,000 is worth $103.81 today.

PV = FV * (1 + interest rate)^time

Your uncle sounds like my dad, who taught me about compound
interesting by giving me IOUs for my good grades in grammar school.  I
should have collect when I found them again 40 years later, but by
then he had given me much more, but probably would have been pleased
with my holding on to them.  Anyway.

Both Pinkfreud and ubiquity are right:  Pink, that not so much you but
the uncle has to be around in fifty years to settle;  Ubiquity on the
calculation, and the suggestion that you might be able to sell the
discounted $ 30,000 (assuming you could document the eventual
payment).  The amount discounted at a more realistic market interest
rate of 5%pa would give a present value of $2,616.11

Go back to your uncle and explain all this to him, and maybe he will
be so impressed that settles for the $2,600, or makes you an offer for
considerably more than the $95  -

Or maybe you will just get a good mark on your homework?

Google should add this to the faq: "How do I discount future payments
to their present value." Folks really should try and read their
Breyley/Meyers. I liked the part (after explaining black/scholes):
"Now if you understood this, you really should have a gin tonic and
relax a minute."

I just want to clarify that the right formula for present value (PV) is

                             PV = FV/(1+r)^n

where 
FV is future value
r is the interest rate
n is the number of years

So, to answer your question: 

                           PV = 30000/(1+0.12)^50
                              = $103.80

Theoritically, you should go with the first option ($30,000 in 50
years)rather than a lump sum of ahem $95, as it is worth more now at
time zero ($103.80).


Regards,

Mohamed El-Kamony
2 May 2006